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The Future of Private Equity: Hong Kong

Why Hong Kong is the future of Private Equity

Private equity is the purchase of shares in operating companies that are not publicly traded on a stock exchange.
A purchase of shares on a public stock exchange where companies are well known, large and regulated/audited, and a purchase of stock makes hardly any difference.
For instance, if you buy 100, or a 1000, or a 100,000 shares of Microsoft, Bill Gates will not notice.
However if you make a $100,000 investment in a start up, you better believe the founders of that company will
  1. Listen closely to what you have to say.
  2. Most likely give you a size-able stake of equity.

Private Equity in the United States

Private equity presents a chance for investors to affect a company in an immediate and dramatic fashion. Unfortunately, in some parts of the world (I’m looking at you America!) starting or funding a private equity firms involves a massive amount of red tape, including compliance issues and investor qualifications. For instance, in the US, any investors in these types of private equity, or Venture Capital firms, need to be either “Qualified” or “Sophisticated”.
The Vultures, as they are often called, who run these firms can only accept investors who meet certain criteria, such as amount of money they have, or how much experience they have investing. If you don’t have at least mil in net worth (not including your house), you are generally not allowed to invest in private equity funds in America. In other places in the world, starting a venture capital fund is significantly easier, albeit not as trendy, as a VC firm on Sand Hill Road in Silicon Valley, and investors don’t need to meet a certain criterion.

Private Equity in Hong Kong

private equity hong kongIn Hong Kong, private equity, or venture capital funds, are less regulated. Private equity is not a licensed or regulated activity (as long as no investors are HK citizens). Before I published on this issue, I wanted to confirm our research, that private equity would not fall into a regulated activity. So we sent an email to the licensing board. Here is their response:

Dear Sir,

Thank you for your email. The management of private equity funds is not explicitly defined in any of the ten types of regulated activities. Type 9 regulated activity refers to the management of securities or futures contracts and real estate investment scheme management. “Securities” and “futures contracts” are defined in Part 1 of Schedule 1 to the SFO. Whether or not the management of private equity funds requires a licence will depend in part upon whether the private equity fund includes “securities” or “futures contracts” as defined in Part 1 of Schedule 1 to the SFO. As an observation, we note that some private equity funds may also invest in listed stocks or other securities. In these cases, a Type 9 licence will be required.

In addition, pursuant to section 114 of the SFO, a person must be licensed to carry on a business in a regulated activity or hold himself out as carrying on a business in a regulated activity. Accordingly, whether a person needs to be licensed, depends on whether the activity he is conducting or holding himself out as conducting, falls within one of the ten types of regulated activities.

To be a licensed corporation, a firm should have at least 2 approved responsible officers who have satisfied the SFC’s competence requirement. Also, the firm needs to put in place adequate internal controls and measures, etc. Also, there is a minimum capital requirement. You may refer to a number of publications we have posted on our website for more information:

Licensing Information Booklet

Guidelines on Competence

Fit and Proper Guidelines

Codes of conduct for persons licensed by or registered with the SFC

Thank you for attention.

Please note that the above information is provided to give you an idea of the current thinking of the Commission staff. You should seek independent legal or other professional advice before taking action on the matters discussed or if you have any doubt about how the law applies to you.

Regards, Licensing Department Securities and Futures Commission 8th Floor, Chater House, 8 Connaught Road Central, Hong Kong Tel: (852) 2840 9222 Fax: (852) 2501 0375

There you have it. Anyone can start a private equity fund in Hong Kong, all you need is a Hong Kong company – which we can set up for you at a cost of just $2500.
If you want to set up a Hong Kong company – the process is straightforward and simple. You can order your Hong Kong Company Incorporation Professional Package now or contact us for further information.
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